FORWARD-LOOKING STATEMENTS In addition to historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements relating to plans, strategies, expectations, intentions, etc. of Streamline Health Solutions, Inc. ("we", "us", "our", or the "Company") and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are no guarantee of future performance and are subject to certain risks and uncertainties that are difficult to predict and actual results could differ materially from those reflected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the timing of contract negotiations and execution of contracts and the related timing of the revenue recognition related thereto, the potential cancellation of existing contracts or clients not completing projects included in the backlog, the impact of competitive solutions and pricing, solution demand and market acceptance, new solution development, key strategic alliances with vendors that resell the Company's solutions, the ability of the Company to control costs, availability of solutions from third party vendors, the healthcare regulatory environment, potential changes in legislation, regulation and government funding affecting the healthcare industry, healthcare information systems budgets, availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results, effects of critical accounting policies and judgments, changes in accounting policies or procedures as may be required by the Financial Accountings Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry generally and the markets in which the Company operates and nationally, and the Company's ability to maintain compliance with the terms of its credit facilities, and other risk factors that might cause such differences including those discussed herein, including, but not limited to, discussions in the sections entitled Part I, "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. We undertake no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission , including the annual report on Form 10-K, quarterly reports on Form 10-Q and any current reports on Form 8-K. The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on From 10-Q. 18 -------------------------------------------------------------------------------- Index to Financial Statements Results of Operations Acquisition of Meta Health Technology, Inc. On August 16, 2012 , the Company acquired substantially all of the outstanding stock of Meta Health Technology, Inc. , a New York corporation ("Meta"). The Company paid a total purchase price of approximately $14,790,000 , consisting of a cash payment of $13,288,000 and the issuance of 393,086 shares of our common stock at an agreed upon price of $4.07 per share. The fair value of the common stock at the date of issuance was $3.82 . As of October 31, 2012 , the Company had acquired 100% of Meta's outstanding shares. The purchase price was subject to certain adjustments related principally to the delivered working capital level, which was settled in the fourth quarter of fiscal 2013, and/or indemnification provisions. Under the acquisition method of accounting, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The operations of Meta are consolidated with the results of the Company from August 16, 2012 . Statement of Operations for the three and nine months ended October 31, 2013 and 2012 (amounts in thousands): Three Months Ended October 31, 2013 October 31, 2012 Change % Change Systems sales $ 348 $ 290 $ 58 20 % Professional services 967 1,090 (123 ) (11 )% Maintenance and support 3,524 3,148 376 12 % Software as a service 1,893 2,006 (113 ) (6 )% Total revenues 6,732 6,534 198 3 % Cost of sales 3,135 3,042 93 3 % Selling, general and administrative 3,373 2,927 446 15 % Product research and development 1,370 867 503 58 % Total operating expenses 7,878 6,836 1,042 15 % Operating loss (1,146 ) (302 ) (844 ) > 100% Other expense, net (5,091 ) (851 ) (4,240 ) > 100% Income tax benefit 5 3,553 (3,548 ) (100 )% Net earnings (loss) $ (6,232 ) $ 2,400 $ (8,632 ) > 100% Adjusted EBITDA(1) $ 553 $ 1,602 $ (1,049 ) (65 )% Nine Months Ended October 31, 2013 October 31, 2012 Change % Change Systems sales $ 2,906 $ 719 $ 2,187 > 100% Professional services 2,925 3,154 (229 ) (7 )% Maintenance and support 10,525 7,797 2,728 35 % Software as a service 5,622 5,358 264 5 % Total revenues 21,978 17,028 4,950 29 % Cost of sales 9,549 8,047 1,502 19 % Selling, general and administrative 10,362 6,801 3,561 52 % Product research and development 3,627 1,834 1,793 98 % Total operating expenses 23,538 16,682 6,856 41 % Operating profit (loss) (1,560 ) 346 (1,906 ) > 100% Other income (expense), net (8,051 ) (1,438 ) (6,613 ) > 100% Income tax expense (159 ) 3,520 (3,679 ) > 100% Net earnings (loss) $ (9,770 ) $ 2,428 $ (12,198 ) > 100% Adjusted EBITDA(1) $ 3,920 $ 4,822 $ (902 ) (19 )% _______________ 19 -------------------------------------------------------------------------------- Index to Financial Statements (1) Non-GAAP measure meaning earnings before interest, tax, depreciation, amortization, stock-based compensation expense, transactional and one-time costs. See "Use of Non-GAAP Financial Measures" below for additional information and reconciliation. System Sales Revenues System sales revenues consisted of the following (in thousands): Three Months Ended October 31, 2013 October 31, 2012 Change % Change System Sales (1): Proprietary software $ 128 $ 27 $ 101 > 100% Term licenses 217 144 73 51 % Hardware & third party software 3 119 (116 ) (97 )% Total System Sales Revenues $ 348 $ 290 $ 58 20 % Nine Months Ended October 31, 2013 October 31, 2012 Change % Change System Sales (1): Proprietary software $ 2,099 $ 162 $ 1,937 > 100% Term licenses 730 144 586 > 100% Hardware & third party software 77 413 (336 ) (81 )% Total System Sales Revenues $ 2,906 $ 719 $ 2,187 > 100% _______________ (1) Proprietary software, hardware, and term licenses are the components of the system sales line item. Term licenses are comprised of Meta software only. Proprietary software and term licenses - Proprietary software revenues recognized for the three and nine months ended October 31, 2013 increased by $101,000 , or over 100%, and $1,937,000 , or over 100%, respectively, over the the prior comparable periods. The nine-month period increase is attributable to a significant new sales in the Collabra suite during the second fiscal quarter. Recurring Collabra term license sales of $217,000 and $730,000 during the three and nine month periods ended October 31, 2013 , respectively, are incremental revenues provided by the acquired Meta operations. Hardware and third party software - Revenues from hardware and third party software sales for the three and nine months ended October 31, 2013 were $3,000 , a decrease of $116,000 , or 97%, and $77,000 , a decrease of $336,000 , or 81%, respectively, over the the prior comparable periods. These decreases are primarily attributable to a reduction in customer demand for third party peripheral devices as compared to the prior year comparable period. Professional services - Revenues from professional services for the three and nine months ended October 31, 2013 were $967,000 , a decrease of $123,000 , or 11%, and $2,926,000 , a decrease of $228,000 , or 7%, respectively, from the prior comparable periods. Professional services provided by the acquired Meta operations for the nine months ended October 31, 2013 were $1,319,000 , and were offset by a decrease in legacy services due to the timing of which revenue could be recognized based on services performed. Maintenance and support - Revenues from maintenance and support for the three and nine months ended October 31, 2013 were $3,524,000 , an increase of $375,000 , or 12%, and $10,525,000 , an increase of $2,727,000 , or 35%, respectively, from the prior comparable periods. The nine-month period increase results largely from revenue provided by the acquired Meta operations (acquired in August 2012 ) of $4,042,000 for the nine months ended October 31, 2013 and was partially offset by planned attrition of certain perpetual license customers. Typically, maintenance renewals include a price increase based on the prevailing consumer price index. Software as a Service ( SaaS ) - Revenues from SaaS for the three and nine months ended October 31, 2013 were $1,893,000 , a decrease of $112,000 , or 6%, and $5,622,000 , an increase of $264,000 , or 5%, respectively, from the prior comparable periods. The decrease during the three-month period ended October 31, 2013 resulted from the expiration of certain customer agreements. The nine-month period increase is attributable to the recognition of add-on SaaS contracts signed, primarily in our Opportunity AnyWare product line. 20 -------------------------------------------------------------------------------- Index to Financial Statements Cost of Sales Cost of sales consisted of the following (in thousands): Three Months Ended (in thousands): October 31, 2013 October 31, 2012 Change % Change Cost of systems sales $ 612 $ 718 $ (106 ) (15 )% Cost of professional services 1,262 855 407 48 % Cost of maintenance and support 740 918 (178 ) (19 )% Cost of software as a service 520 551 (31 ) (6 )% Total cost of sales $ 3,134 $ 3,042 $ 92 3 % Nine Months Ended October 31, (in thousands): October 31, 2013 2012 Change % Change Cost of systems sales $ 1,912 $ 1,937 $ (25 ) (1 )% Cost of professional services 3,504 1,911 1,593 83 % Cost of maintenance and support 2,520 2,350 170 7 % Cost of software as a service 1,613 1,850 (237 ) (13 )% Total cost of sales $ 9,549 $ 8,048 $ 1,501 19 % The increases in cost of sales for the three and nine months ended October 31, 2013 from the comparable periods are primarily the result of incremental operational costs incurred for the acquired Meta operations as well as the amortization of the internally-developed software acquired as part of the Meta acquisition. Cost of systems sales includes amortization and impairment of capitalized software expenditures, royalties, and the cost of third-party hardware and software. Cost of systems sales, as a percentage of systems sales, varies from period-to-period depending on hardware and software configurations of the systems sold. The relatively fixed cost of the capitalized software amortization, without the addition of any impairment charges, compared to the variable nature of system sales, causes these percentages to vary dramatically. The cost of professional services includes compensation and benefits for personnel and related expenses. The increase in expense is primarily due to incremental operational costs associated with the acquired Meta operations, as well as increases in staffing for our Opportunity AnyWare services line. The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts. The increase in expense is primarily due to incremental operational costs associated with the acquired Meta operations. The cost of software as a service is relatively fixed, but subject to inflation for the goods and services it requires. The decreases are related to incremental data center costs that were incurred in the prior comparable periods that had no comparable expense for the three and nine months ended October 31, 2013 . Selling, General and Administrative Expense Three Months Ended (in thousands): October 31, 2013 October 31, 2012 Change % Change General and administrative expenses $ 2,519 $ 2,263 $ 256 11 % Sales and marketing expenses 854 664 190 29 % Total selling, general, and administrative $ 3,373 $ 2,927 $ 446 15 % 21 -------------------------------------------------------------------------------- Index to Financial Statements Nine Months Ended October 31, October 31, (in thousands): 2013 2012 Change % Change General and administrative expenses $ 7,995 $ 5,116 $ 2,879 56 % Sales and marketing expenses 2,367 1,685 682 40 % Total selling, general, and administrative $ 10,362 $ 6,801 $ 3,561 52 % General and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and entertainment expenses related to the Company's executive and administrative staff, general corporate expenses, amortization of intangible assets, and occupancy costs. The increases over the prior year are primarily due to the incremental increase for general and administrative expenses associated with the acquired Meta operations. Amortization of intangible assets added incremental expense to the three and nine months ended October 31, 2013 due to the amortization of assets acquired as part of the acquisition of Interpoint and Meta. The Company recognized approximately $315,000 and $946,000 , respectively, in amortization expense for the three and nine months ended October 31, 2013 for acquired intangible assets as compared to $250,000 and $276,000 , respectively, in the prior comparable periods. The Company also incurred increased expense due to investor relations and acquisition search activities, as well as additional costs from executive severances and other costs associated with our corporate office move to Atlanta, Georgia . Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and entertainment expenses related to the Company's sales and marketing staff; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses. The increase in sales and marketing expense reflects an increase in costs associated with increased trade show activity and other marketing programs. Product Research and Development Three Months Ended (in thousands): October 31, 2013 October 31, 2012 Change % Change Research and development expense $ 1,370 $ 867 $ 503 58 % Plus: Capitalized research and development cost 250 601 (351 ) (58 )% Total R&D cost $ 1,620 $ 1,468 $ 152 10 % Nine Months Ended October 31, (in thousands): October 31, 2013 2012 Change % Change Research and development expense $ 3,627 $ 1,834 $ 1,793 98 % Plus: Capitalized research and development cost 1,048 1,571 (523 ) (33 )% Total R&D cost $ 4,675 $ 3,405 $ 1,270 37 % Product research and development expenses consist primarily of compensation and related benefits; the use of independent contractors for specific near-term development projects; and an allocated portion of general overhead costs, including occupancy. Research and development expense increased due to higher support for newly released software versions, which also decreased the number of hours available to be capitalized, which is reflected in the capitalized research and development costs. The acquired Meta operations contributed an incremental $524,000 and $1,292,500 , respectively, in research and development expenses for the three and nine months ended October 31, 2013 . The hours available for capitalization decreased for the HIM product line, and costs not eligible for capitalization increased compared to the prior comparable periods. Research and development expenses for the nine months ended October 31, 2013 and 2012, as a percentage of revenues, were 17% and 11%, respectively. Other Income (Expense) Interest expense for the three months ended October 31, 2013 and 2012 were $580,000 and $895,000 , respectively, and $1,735,000 and $1,494,000 , respectively, for the nine months ended October 31, 2013 and 2012. Interest expense consists of interest and commitment fees on the line of credit, interest (including accruals for success fees) on the term loans entered into in conjunction with the Interpoint and Meta acquisitions, interest on the convertible note entered into in conjunction with the Interpoint acquisition, and is inclusive of deferred financing cost amortization expense. Interest expense decreased for the three months ended October 31, 2013 over the prior comparable period due to of the interest accrued on the convertible note entered 22 -------------------------------------------------------------------------------- Index to Financial Statements into in conjunction with the Meta Acquisition, which was converted into shares of preferred stock on November, 1 2012. Interest expense increased for the nine months ended October 31, 2013 over the prior comparable period primarily due to increases from the term loan interest and success fees, and amortization of deferred financing costs related to the Meta acquisition. The Company also recorded a valuation adjustment to its warrants liability, recorded as miscellaneous expense, of $412,000 and $2,083,000 , respectively, for the three and nine months ended October 31, 2013 , using assumptions made by management to adjust to the current fair market value of the warrants at October 31, 2013 . Provision for Income Taxes The Company recorded tax expense (benefit) of $(5,000) and $12,000 , respectively, for the three months ended October 31, 2013 and 2012 and $159,000 and $45,000 , respectively, for the nine months ended October 31, 2013 and 2012, which is comprised of estimated federal, state and local tax provisions. Included in the nine months ended October 31, 2013 , tax expense of approximately $100,000 from the second fiscal quarter related to an immaterial error correction to the Company's January 31, 2013 net deferred tax liability related to the Interpoint acquisition. The Company concluded that the impact of the correction was neither quantitatively nor qualitatively material to the prior fiscal year end or the respective quarters ended in 2012 and 2013. Backlog October 31, 2013 October 31, 2012 Company proprietary software $ 2,529,000 $ 3,650,000 Hardware and third-party software 20,000 84,000 Professional services 7,141,000 4,348,000 Maintenance and support 28,234,000 21,535,000 Software as a service 17,087,000 19,117,000 Total $ 55,011,000 $ 48,734,000 At October 31, 2013 , the Company had master agreements and purchase orders from clients and remarketing partners for systems and related services which have not been delivered or installed which, if fully performed, would generate future revenues of approximately $55,011,000 compared with $48,734,000 at October 31, 2012 . The Company's proprietary software backlog consists primarily of signed agreements to purchase software licenses and term licenses. Third-party hardware and software consists of signed agreements to purchase third-party hardware or third-party software licenses that have not been delivered to the client. These are products that the Company resells as components of the solution a client purchases. The decrease in backlog is primarily due to a reduction in the volume of third-party sales as opposed to the prior comparable period. These items are expected to be delivered in the next twelve months as implementations commence. Professional services backlog consists of signed contracts for services that have yet to be performed. Typically, backlog is recognized within twelve months of the contract signing. The increase in backlog is due to several clients that signed contracts during fiscal 2012 for add-on solutions, upgrades, or expansion of services at additional locations for which contracted services have not yet been performed. Maintenance and support backlog consists of maintenance agreements for licenses of the Company's proprietary software and third party hardware and software with clients and remarketing partners for which either an agreement has been signed or a purchase order under a master agreement has been received. The Company includes in backlog the signed agreements through their respective renewal dates. Typical maintenance contracts are for a one year term and are renewed annually. Clients typically prepay maintenance and support which is billed 30-60 days prior to the beginning of the maintenance period. Maintenance and support backlog at October 31, 2013 was $28,234,000 as compared to $21,535,000 at October 31, 2012 . A significant portion of this increase is due to backlog added by Meta maintenance contracts. Additionally, as part of renewals contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics. At October 31, 2013 , the Company had entered into software as a service agreements, which are expected to generate revenues of $17,087,000 through their respective renewal dates in fiscal years 2013 through 2018. Typical SaaS terms are one to seven years in length. The commencement of revenue recognition for SaaS varies depending on the size and complexity of 23 -------------------------------------------------------------------------------- Index to Financial Statements the system, the implementation schedule requested by the client, and ultimately the official go-live on the system. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period. All of the Company's master agreements are generally non-cancelable but provide that the client may terminate its agreement upon a material breach by the Company, or may delay certain aspects of the installation. There can be no assurance that a client will not cancel all or any portion of a master agreement or delay portions of the agreement. A termination or delay in one or more phases of an agreement, or the failure of the Company to procure additional agreements, could have a material adverse effect on the Company's financial condition, and results of operations. Use of Non-GAAP Financial Measures In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used by management and the board of directors in its financial and operational decision-making, the Company may supplement the Consolidated Financial Statements presented on a GAAP basis in this quarterly report on Form 10-Q with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by the Company, may differ from and may not be comparable to similarly titled measures used by other companies. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share The Company defines: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, and transaction expenses and other one-time costs; (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing the Company's operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization), items outside the control of the management team (taxes), and costs that we expect to be non-recurring including: transaction related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share will include incremental shares in the share count that would be considered anti-dilutive in a GAAP net loss position. The board of directors and management also use these measures as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and, (ii) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs. The Company's lenders use Adjusted EBITDA to assess our operating performance. The Company's credit agreements with its lender require delivery of compliance reports certifying compliance with financial covenants certain of which are based on an adjusted EBITDA measurement that is the same as the Adjusted EBITDA measurement reviewed by our management and board of directors. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share as disclosed in this quarterly report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of Company results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA, and its variations are: 24 -------------------------------------------------------------------------------- Index to Financial Statements • EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; • EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement; • EBITDA does not reflect income tax payments we are required to make; and • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers to review the GAAP financial statements included elsewhere in this quarterly report on Form 10-Q, and not rely on any single financial measure to evaluate our business. The Company also strongly urges readers to review the reconciliation of GAAP net earnings (loss) to Adjusted EBITDA, and GAAP earnings (loss) per diluted share to Adjusted EBITDA per diluted share in this section, along with the Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q. The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net earnings (loss), a comparable GAAP-based measure, as well as earnings (loss) per diluted share to Adjusted EBITDA per diluted share. All of the items included in the reconciliation from net earnings (loss) to EBITDA to Adjusted EBITDA and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing the Company's on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess the Company's comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-recurring expenses and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess the Company's operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance. 25 -------------------------------------------------------------------------------- Index to Financial Statements The following table reconciles net earnings (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share for the three and nine months ended October 31, 2013 and 2012 (amounts in thousands, except per share data): Three Months Ended Nine Months Ended Adjusted EBITDA Reconciliation October 31, 2013 October 31, 2012 October 31, 2013 October 31, 2012 Net earnings (loss) $ (6,232 ) $ 2,400 $ (9,770 ) $ 2,428 Interest expense 580 895 1,735 1,494 Income tax expense (benefit) (5 ) (3,553 ) 159 (3,520 ) Depreciation 152 184 490 547 Amortization of capitalized software development costs 691 708 2,087 1,928 Amortization of intangible assets 314 229 946 257 Amortization of other costs 23 - 47 - EBITDA (4,477 ) 863 (4,306 ) 3,134 Stock-based compensation expense 378 245 1,204 645 Associate severances and other costs relating to transactions or corporate restructuring - - 383 - Non-cash valuation adjustments to assets and liabilities 4,514 - 6,223 - Transaction related professional fees, advisory fees, and other internal direct costs 138 494 363 1,043 Other non-recurring operating expenses - - 53 - Adjusted EBITDA $ 553 $ 1,602 $ 3,920 $ 4,822 Adjusted EBITDA margin(1) 8 % 25 % 18 % 28 % Earnings (loss) per share - diluted $ (0.50 ) $ 0.15 $ (0.82 ) $ 0.18 Adjusted EBITDA per adjusted diluted share (2) $ 0.03 $ 0.10 $ 0.22 $ 0.39 Diluted weighted average shares 13,257,943 15,365,238 12,884,711 12,417,256 Includable incremental shares - adjusted EBITDA(3) 5,058,763 - 5,130,937 - Adjusted diluted shares 18,316,706 15,365,238 18,015,648 12,417,256 _______________ (1) Adjusted EBITDA as a percentage of GAAP revenues (2) Adjusted EBITDA per adjusted diluted share for the Company's common stock is computed using the more dilutive of the two-class method or the if-converted method (3) The number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP profit is earned in the current period, no additional incremental shares are assumed Application of Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations, of Part II, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2013 . There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013 . Liquidity and Capital Resources The Company's liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development, capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company's primary cash requirements include regular payment of payroll and other business expenses, interest payments on debt, and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal 26 -------------------------------------------------------------------------------- Index to Financial Statements development efforts or infrastructure in the SaaS data center. Operations are funded by cash generated by operations and borrowings under credit facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for the next twelve months. Cash and cash equivalents balances at October 31, 2013 and January 31, 2013 were $4,264,000 and $7,500,000 , respectively. Continued expansion may require the Company to take on additional debt, or raise capital through issuance of equities, or a combination of both. There can be no assurance the Company will be able to raise the capital required to fund further expansion. Significant cash obligations As of October 31, As of January 31, (in thousands) 2013 2013 Term loans (1) $ 12,750 $ 13,688 Interpoint Partners note payable (1) 900 - Interpoint Partners earn-out (1) 1,300 1,320 Capital leases (2) 284 - _______________ (1) Reference "Note F - Debt" in the Notes to the Condensed Consolidated Financial Statements for additional information. (2) The Company entered into a capital lease for computer equipment that will commence November 1, 2013 . The lease is for a 24-month period and we will be obligated to pay approximately $284,000 over that period. Operating cash flow activities Nine Month Ended (in thousands) October 31, 2013 October 31, 2012 Net earnings (loss) $ (9,770 ) $ 2,428 Non-cash adjustments to net earnings (loss) 11,398 184 Cash impact of changes in assets and liabilities (866 ) (143 ) Operating cash flow $ 762 $ 2,469 Net cash provided by operating activities in fiscal 2013 decreased in the current year primarily due to a decrease in profitability, offset by several non-cash valuation adjustments. Additional non-cash adjustments include amortization expense from capitalized software development costs and intangible assets and an increased share based compensation expense. The Company's clients typically have been well-established hospitals or medical facilities or major health information system companies that resell the Company's solutions, which have good credit histories and payments have been received within normal time frames for the industry. However, some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the availability of financing for some of our clients. Investing cash flow activities Nine Months Ended (in thousands) October 31, 2013 October 31, 2012 Purchases of property and equipment $ (106 ) $ (546 ) Capitalized software development costs (1,048 ) (1,571 ) Payments for acquisitions (3,000 ) (12,162 ) Investing cash flow $ (4,154 ) $ (14,279 ) The decrease in cash used for investing activities is primarily a result of a reduction in the hours eligible for capitalization, as well as a decrease in capital expenditures as compared to the prior comparable fiscal quarter. The Company estimates that to replicate its existing internally developed software would cost significantly more than the stated net book value of $11,778,000 , including acquired internally developed software of Meta and Interpoint, at October 31, 2013 . Many of the programs related to capitalized software development continue to have significant value to the Company's current solutions 27 -------------------------------------------------------------------------------- Index to Financial Statements and those under development, as the concepts, ideas, and software code are readily transferable and are incorporated into new solutions. Financing cash flow activities Nine Months Ended (in thousands) October 31, 2013 October 31, 2012 Net change in borrowings $ (938 ) $ 9,880 Proceeds from the exercise of stock options and stock purchase plans 1,094 162 Payment of deferred financing costs - (1,246 ) Proceeds from private placement - 12,000 Payment of success fee - (700 ) Financing cash flow $ 156 $ 20,096 The decrease in cash from financing activities was primarily the result of proceeds from the private placement during the nine months ended October 31, 2012 and the net change in borrowings, offset by an increase in proceeds from the exercise of stock options. 28 -------------------------------------------------------------------------------- Index to Financial Statements
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